A Strong Euro With Few Admirers

By MARK LANDLER

Published: May 9, 2003

FRANKFURT, May 8—
Three years ago, Europeans were wringing their hands over a seemingly endless slide in the value of the euro. These days, the currency is pole-vaulting ahead of the United States dollar, nearing levels it has not achieved since its introduction in January 1999.

So are the Europeans cheering? Hardly.

The euro's rise has set off a new bout of hand-wringing by business executives, economists and politicians, who fear that a strong currency could stir up as many problems as the weak one did. And while the problems are different, at a time of weak economic growth in Europe, they may be no less troublesome.

''It's a real threat,'' said Thomas Mayer, chief European economist at Deutsche Bank. ''For Europe's exporters, it's like being a jogger, constantly running uphill and against headwinds.''

Today, the European Central Bank resisted intense pressure to cut interest rates to offset the surging euro. The bank's president, Wim Duisenberg, said at a news briefing that ''there's not yet anything excessive'' about the currency's rise. It promptly jumped again in European trading, to $1.15, a new four-year high. Later in New York, the euro settled at $1.1493, compared with $1.1369 late Wednesday.

Mr. Duisenberg said the central bank wanted to see if the euro's rise had staying power before easing its policy. ''We have to know more,'' he said, like whether it ''will continue, or will peter out, or will reverse.''

With the euro up 4 percent against the dollar in the last two weeks, and roughly 30 percent since January 2001, companies like Volkswagen, Swatch and Henkel are contending that the situation has already dented sales, both through the conversion of dollar-based sales into euros and by making their goods more expensive for American consumers.

''I cannot recall the currency ever having had such a material effect on results,'' said Nikolaus Schweickart, the chairman of Altana, a German drug company that gets 26 percent of its sales in the United States. ''The weak dollar has had the effect of cutting our upward spurt in half.''

Altana reported a 10 percent jump in sales in the first quarter. If the exchange rate had remained steady, the jump would have been closer to 20 percent. Mr. Schweickart's emphasis on the weak dollar underlines a main reason that the galloping euro is not seen as a cause for celebration here.

Whatever the political benefits of a strong currency -- especially one that originally got off on the wrong foot -- people here know that the euro's surge now is less a reflection of European strength than of American weakness.

With ballooning current-account and budget deficits, the United States these days is a less attractive place for investors to put their money, and other countries, like Japan, scarcely look better. So Europe, by virtue of its stability and relatively sturdier public finances, has soaked up a lot of global capital.

''Europe's weak economies should not attract that much investment,'' said Michael Heise, chief economist at Allianz, the huge German insurer. ''But investors expect a long-term period of deficits in the U.S. That is worrying.''

For Mr. Heise, the rapid appreciation of the euro meant rewriting a presentation he gave this week to his bosses at Allianz about how they should allocate assets.

Allianz is also revising its projections for the euro's value. Originally, it forecast parity with the dollar at the end of this year and a rise of 10 to 15 percent in 2004. But to the surprise of Mr. Heise and other economists, the dollar got no lift from the end of the Iraq war, and an expected gradual appreciation in the euro's exchange value instead became a spike.

Commerzbank, which has also revised its forecast, now expects the euro to settle at $1.12 to the dollar by August.

Some experts contend that the euro was growing in stature even before the recent tide of red ink in Washington.

Niall C. Ferguson, a professor of financial history at New York University, said there had been a marked shift in the global bond market toward euro-denominated bonds. From 1995 to 1999, he said, 53 percent of all corporate and sovereign bonds were issued in dollars, and only 20 percent in the currencies of the 12 European countries that now use the euro.

But in the four years since the common currency began trading, Professor Ferguson said, 44 percent of new global bonds have been issued in euros, nearly equaling the 48 percent issued in dollars.

''I'm not wholly convinced the euro is the heir to the dollar,'' he said. ''But there is evidence that investors are switching from dollars to euros. I'm absolutely sure some of it is a reaction to the deficit.''

The trouble is that long-term weakness in the dollar -- which many European economists expect -- is likely to inflict more pain on countries that export to the United States than on Americans themselves.

True, a summer trip to Tuscany will be more expensive for American tourists, while a Las Vegas vacation will be cheaper for Europeans. But such windfalls will be more than offset by the price pressure on exports, which have been a rare source of economic momentum in countries like Germany.